Cable capex still peaking with major network investments

After major network infrastructure investments in technologies like DOCSIS 3.1, as well as a series of ambitious postmerger integrations, cable operator capital expenditures are still peaking. However, capex is set to decline over the next five years.

According to New Street Research, capex as a percentage of revenue will drop from a current level of 15% in the cable industry to around 10% over that five-year span. Meanwhile, capex per home passed will fall from $140 to $120.

Top U.S. operator Comcast, which is in the closing phases of its DOCSIS 3.1 network upgrade, as well as the national rollouts of its X1 video platform and advanced gateways, is already on the downslope. According to MoffettNathanson, the operator had capex of $9.404 billion in 2017, while also factoring intangibles such as software expenses. In 2018, the research company forecasts Comcast capex to decline 2.4% to $9.177 billion.

“For 2018, spending on customer premise equipment is expected to continue to decline. With X1 now deployed to nearly 60% of our residential video base, the pace of our rollout has started to slow,” noted Comcast CFO Michael Cavanaugh during Comcast’s fourth-quarter earnings call in January.

Conversely, at Altice USA, which is still early in an ambitious five-year plan to upgrade its entire Northeastern Optimum footprint to FTTH, capex is still trending upward. After incurring capex of $991 million in 2017, MoffettNathanson expects Altice to increase spending to $1.352 billion in 2018.

Indeed, while long-term projections point to cable industry capex trending downwward, the near term is a bit nuanced for the time being, with each large operator telling a different story.

Here’s a snapshot of publicly traded operators:

Comcast

According to capex data provided directly by Comcast, which doesn’t include the “intangibles” added by MoffettNathanson, as well as NBCU capex, Comcast capex related just to cable operations increased from $7.596 billion in 2016 to $7.952 billion in 2017. Capex as a percentage of revenue, however, fell from 15.2% to 15.1% over that span.

Despite analyst projections of a narrow capex decline, Cavanaugh said during January’s fourth-quarter earnings call that “Our spending on our network will continue to increase. As a result, we expect cable capital expenditures overall to increase in 2018, although we believe our capital intensity could be favorable relative to 2017 by as much as 50 basis points.”

Here's the capex chart that Comcast included in its fourth-quarter earnings report:

Charter Communications

During Charter’s fourth-quarter earnings call in early February, CFO Christopher Winfrey said the company's 2018 capex "should be driven by many of the same factors as last year, including customer growth, Spectrum migration, all-digital, and in-sourcing and integration." He did say, however, that capital intensity would decline.

Charter reported capex of $8.681 billion for 2017, with MoffettNathanson predicting a rise to $8.822 billion in 2018.

“Next year, 2019 that is, should deliver a meaningful decline in capital intensity and dollars,” Winfrey added, with Charter finishing up its all-digital push, as well as its integrations of Time Warner Cable and Bright House Networks operations. The deployments of Charter’s Spectrum Guide video system and DOCSIS 3.1 upgrades will also be wrapping up.

"And even with video unit growth, the dollars of video CPE should also dramatically drop with a fully deployed base of modern two-way set-top boxes with the DOCSIS modem inside,” Winfrey added.

Here’s the capex chart Charter included with its fourth-quarter report:

Altice USA

Altice USA reported a 3.6% bump in capex last year to $991 million, as the company began its ambitious FTTH project in the Northeast, as well as the rollout of its new Altice One CPE package.

MoffettNathanson predicts a capex spike to $1.352 billion for Altice USA in 2018, while Morgan Stanley analyst Ben Swinburne forecasts a $3 billion rise in spending over the next five to six years as the cable operator completes its fiber rollout.

Also factoring into Altice’s capex growth: the deployment of a wireless service based on an MVNO agreement with Sprint made last year.

Here’s the capex chart Altice included with its fourth-quarter report last week:

Cable One

Other operators of greater size might look more symmetrical when placed on a capex analysis alongside much bigger cable companies like Comcast, Charter and Altice. Cox Communications and Mediacom come to mind, but they are both privately held.

WideOpenWest, meanwhile, is bigger than Cable One, but it didn’t report earnings until Thursday.

So that leaves Phoenix, Arizona-based Cable One to deliver a snapshot of the medium-sized cable operator spectrum. Cable One has familiar expenses: It’s still integrating 2017 acquisition New Wave Communications into its fold; and it’s still rolling out its DOCSIS 3.0-powered gigabit-speed product across its footprint.

MoffettNathanson predicts Cable One capex to rise from $179 million in 2017 to $193 million next year.